An important aspect of municipal finance involves capital budgeting and resource allocation. In some cases, resource allocations involve expenditures that are not directly revenue generating such as road improvements, maintaining park (green space) areas or constructing sidewalks, etc. In these cases, the decision to expend resources often depends upon engineering reports or quality of life arguments. For example the consideration of outlays for roads would be preceded by municipal engineers evaluating each road as to whether it was below the town's standards and any recommended plan of action detailing construction parameters and costs. Performing a rigorous cost-benefit analysis in these situations is difficult as the benefits are often intangible, indirect, or difficult to measure. Thus, while sidewalks may be a desirable project to undertake, the incremental effect on property values and thelikelihood of subsequent increase in property tax revenues are difficult to quantify.
In contrast, some municipal expenditures can have direct revenue effects due to their impact on efficiency; either in the reduction of costs and/or in the collection of revenue. Capital expenditures of this type are of special interest to municipalities who own and operatetheir utilities. In the current case, we will examine an asset replacement project using data from a municipal water company, owned and operated by the Town of Lakewood Village. The goal of our case is to perform an economic analysis of the merits of the program and evaluate the financial implications of the decision.